Less than a year ago, turmoil at a few banks resulted in some of the largest bank failures on record. Failures at Silicon Valley Bank (a subsidiary of SVB Financial) and First Republic Bank called for government intervention, including unprecedented action by the Federal Deposit Insurance Corporation (FDIC).
Over 100 financial institutions will shoulder the bailout cost as the FDIC imposes a special assessment to replenish the Deposit Insurance Fund. The total cost is $16.3 billion, with larger banks paying for the bulk of it. Here are the banks that paid the most and how it impacted their bottom line.
Three of the four largest bank failures ever happened last year
The failures of Silicon Valley Bank, First Republic Bank, and Signature Bank last March were three of the four largest bank failures ever. Washington Mutual was the only bank larger than those, and it went under in 2008 with over $307 billion in assets.
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These banks were ill-prepared for the rapidly rising interest rate environment we've been in since the Federal Reserve began raising interest rates in March 2022. Because of the inverse relationship between interest rates and fixed-rate securities, these banks were sitting on a pile of securities and bonds with huge unrealized losses.
This isn't a problem for banks as long as they can hold these assets for the long haul. However, problems arose when their funding source, customer deposits, began to flow out of the bank. For example, Silicon Valley Bank served niche customers around the start-up community. It also had a lot of deposits above FDIC's $250,000 insurance threshold, including big investors like Sequoia Capital, with over $1 billion in deposits, and Roku, which had $420 million with the bank.
Protecting uninsured deposits cost the FDIC over $16 billion
When the Silicon Valley Bank announced a plan to raise $2 billion in capital, customers got nervous about their deposits and began pulling funds in troves, kick-starting a death spiral for the bank. The FDIC moved quickly to create a bridge bank, which assumed all deposits and most of the assets of Silicon Valley Bank. It also guaranteed all deposits for the bank, 85% of which were above the FDIC's $250,000 threshold.
The FDIC relies on the Deposit Insurance Fund (DIF) to cover the costs relating to the failed institutions. The DIF is funded through quarterly assessments through banks and interest earned on funds invested in U.S. government securities.
The Federal Deposit Insurance Act requires the FDIC to recover losses that stem from protecting uninsured depositors through a special assessment. The total cost of the failures of Silicon Valley Bank and Signature Bank cost the FDIC around $18.7 billion, with around $16.3 billion covering uninsured bank deposits.
Here's how much the largest banks are paying the FDIC
The FDIC's special assessment hit the largest banks the most. Here's how much the FDIC assessed the top seven largest banks in the U.S.:
- JPMorgan Chase (JPM +0.11%): $2.9 billion
- Bank of America (BAC +0.78%): $2.1 billion
- Wells Fargo (WFC +0.20%): $1.9 billion
- Citigroup (C +2.20%): $1.7 billion
- U.S. Bancorp (USB +2.61%): $734 million
- Goldman Sachs (GS +2.88%): $529 million
- PNC Bank (PNC +2.13%): $515 million
The special assessment has impacted bank earnings this year in a big way. JPMorgan Chase, the largest payer due to its size, would've had a net income of $12.2 billion, excluding the assessment. Including the assessment, its earnings dropped by 24%.
The assessment also reduced earnings at Bank of America by 40% and Wells Fargo by 36%, while Citigroup's restructuring caused a loss in the quarter, which ballooned to $1.8 billion with the assessment.
NYSE: JPM
Key Data Points
What bank investors should watch for next
The FDIC's assessment doesn't come as a surprise, as it has been known since the bank failures last year that the agency would have to replenish the DIF. Although the assessment reduced earnings, the FDIC prevented further bank runs before they became an even bigger problem last year.
While the one-time charge dragged earnings, it shouldn't make or break an investing thesis on bank stocks. Instead, investors will want to monitor other factors for banks in the coming quarters, including credit quality, potential regulatory changes, and possible interest rate cuts.
The SPDR S&P Bank ETF index is up 30% since late October on hopes of a Federal Reserve pivot, so it wouldn't be too surprising if these stocks took a breather here. If bank stocks do dip from here, it could be a great chance to scoop up shares at cheap prices ahead of possible interest rate reductions later in the year.
